Product Market Integration, Comparative Advantages and
Labour Market Performance*
In a two-country model with trade driven by comparative advantages, it is considered how
imperfectly competitive labour markets are affected by lower frictions in international goods
trade. Easier goods trading is equivalent to increased mobility of employment across
countries and thus a change in the trade-off between wages and employment faced by wage
setters. While the effects of product market integration on the trade-off between wages and
employment in general is ambiguous, it is shown that product market integration works like a
general improvement in productivity via the specialization it allows through trade.
Unambiguously, real wages and employment and welfare improve upon reductions in trade
frictions, and therefore workers are better off irrespective of whether the market power of
unions is enhanced or muted.
JEL Classification: F15, J30, J50
Keywords: trade frictions, wage formation, employment, welfare gains